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How To Compete With High Frequency Traders 

Last Updated: March 21, 2022

By Rayner Teo


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In today’s episode, you’ll discover what you must do to compete with high frequency traders.

So tune in right away…


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Hey, hey, what’s up my friend?

In today’s episode, I want to talk about how to compete with high frequency traders (HFT), or with artificial intelligence. As a retail trader, what can you do to compete with these algorithms and HFT firms?

These are traders who are trading many times a day and they are more well-funded than you. They are faster than you. They’re probably smarter than you with a lot of PhD people working on these algorithms.

So as a retail trader, how do you compete? I’m sure that’s pretty much a question that’s on many retail traders’ minds. You might be thinking, “What advantages do I have? I’m slower, I’m not as smart, I’m less funded, etc.”

In today’s episode, I want to share with you three things you can do to level the playing field.

1. Trade on the higher timeframe

Here’s the thing…

HFT traders operate on the lower timeframe and they are not here to capture swings in the market nor to ride trends. They’re just there to scalp that few pips and that’s it.

They trade thousands of times a day just to earn that one or two cents while suffering a bit of loss here and there. Then hopefully after these thousands of trades, they do come up profitable.

They are trading at a high frequency with small profit margin, doing stuff like statistical arbitrage, index arbitrage, volatility arbitrage and stuff like that.

So if you want to compete with this type of HFTs, then you want to be moving up to the higher timeframe.

And you might be thinking, “If I move up to the higher timeframe, why am I safer? Won’t the HFTs come into my timeframe and you and take away whatever profits that’s available for me?” Well, that’s unlikely.

HFTs operate in lower timeframe because their expenses are very high. They have to pay for servers, coolers, location, and the exchange. They have very high maintenance costs and have to pay the developers, the programmers for the codes and whatsoever.

They need to make money as consistently as possible every day, every week or every month. I think Virtu Financial mentioned in one article that out of the thousand-plus trading days, they only had one losing day.

And that’s why HFT traders are not interested in trading of the higher timeframe because it takes too long to see a profit. If you trade off the daily timeframe, you may not make money every day, every week or even every month. HFTs don’t want that inconsistency.

They want something that is consistent so that they can see money every single day and that’s why they operate on such a low timeframe.

2. Adopt trading strategies that exploit certain market phenomenon

For example in the stock markets, there’s a mean reversion bias to it. If you look at the US stock market from inception till now, you can see that the stock market is actually in a long term uptrend.

Yes, we have dips and recessions along the way, but if you look at the chart from left to right, it’s going up higher over time. There’s a long term upward bias in the stock markets.

On top of it, for stock markets, it’s not easy to be a short seller unlike the futures market or the forex market because of regulations. That’s why when you trade the stock markets with a mean reversion trading strategy, there are certain biases built-in for you exploit it.

When the stock market is in a pullback, there’s a good chance that the pullback will end and the uptrend will continue. By trading a mean reversion trading strategy, there is a bias or a concept behind it that makes sense, which will give you an edge as a trader.

For HFT traders, they probably won’t do this because it’s too slow for them. Larger hedge funds might adopt such trading systems, but you as a retail trader can also take part in it. So that’s one example of trading strategy that has a sound logic to it

3. Always test your trading strategies

You have to be willing to research to find out new trading strategies, to find out what works and what doesn’t.

You can’t just leave it up to forums, blog posts or TradingwithRayner to tell you what works and what doesn’t, because you shouldn’t take anything that I say at face value.

What I’m sharing is based on my own experience and my research which I could be wrong and I’ve been wrong many times. Whatever you’ve learned on the internet or books, blogs, forums or whatsoever, you have to do the testing.

Let me give you a couple of examples.

Example #1:

Renaissance Technologies is a hedge fund run by Jim Simons. I think he’s possibly one of the richest traders out there. And the way they develop trading systems is that they exploit certain patterns in the market.

They have no idea why that pattern works. But they realized those patterns are very consistent. It simply works over whatever data set they’ve done their testing on. And they’ll trade that pattern.

They’re also always testing out new patterns to trade with, even though there’s no logic to it. And that contradicts with what I said earlier because you’re not HFT, you’re a retail trader trading on the higher timeframe.

For HFT traders on such a low timeframe, they might just identify patterns that have been recurring repetitively. They might just trade a pattern without any rhyme or reason without any logic to it. But as long as the pattern works, they will trade it.

And they’re always testing out new patterns that they can identify to trade on. So that’s one example of possibly one of the best HFT trading firms in the world doing that, always testing.

Example #2:

There’s another trader they want to share with you, Andrea Unger, he’s the World Cup trading champion, possibly one of the best independent retail traders out there.

If you study his work, he’s also always testing individual markets to see if the market is having a trending behaviour or is it having a mean-reverting behaviour.

How would the results change if a 100-pip stop loss and a 200-pip target profit are used for a market? How would the results change? How would the backtest results differ?

He’s always testing, finding out new ideas and becoming a better trader. And these are people that are pretty much at the top of the game. Now, what about you, the retail trader watching a video from me?

Well, you’d better be willing to do the work, do the testing and research to validate new trading ideas or concepts. If you’re not willing to, then you’ll be pretty much out of luck and out of business in no time. It’s going to be difficult for you to win in this business.

With that said, I hope that gives you a glimmer of hope to what you can do to compete with the HFTs, the AIs, whatsoever. I wish you good luck and good trading. I’ll talk to you


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